Alcoa profit cut in half on slumping demand

Alcoa, the largest US aluminum producer, said third-quarter profit fell by more than half because of lower prices, slumping demand in North America and costs to shut down a Texas smelter.

Net income dropped to $US268 million, or 33 cents a share, from $US555 million, or 63 cents, a year earlier, New York-based Alcoa said in a statement. Profit a year ago was boosted by a 25 cent-per-share gain after the company sold a stake in Aluminum Corp. of China. Sales fell 2.1% to $US7.23 billion.

Chief executive Klaus Kleinfeld, facing lower demand and slumping prices as the credit crisis reduces manufacturing, is trimming production and seeking long-term power agreements to cut costs. The company has said demand in North America to fall at least 5% this year, while aluminum prices dropped 22% in the third quarter.

''Slowing global growth, risks with the financial crisis and rising aluminum stocks are weighing on aluminum fundamentals,'' Morgan Stanley analysts including Mark Liinamaa wrote in a note to investors. ''The case for a near-term recovery for aluminum prices has deteriorated.''

Excluding some items, Alcoa earned 37 cents a share. The average estimate of 18 analysts in a Bloomberg News survey was for 51 cents a share.

Alcoa, the first company in the Dow Jones Industrial Average to report earnings for the quarter, fell 60 cents, or 3.6%, to $US16.11 in trading after the official close of the New York Stock Exchange.

Production Trimmed

Alcoa said it will trim production because of lower demand and is stopping all ''non-critical'' capital projects. The company also said it will suspend its share buyback program.

''Aluminum prices have fallen steeply and demand has softened further,'' Kleinfeld said in the statement. ''The resulting margin squeeze will have a greater impact going forward, but will be somewhat mitigated by the easing of energy prices and a stronger US dollar.''

Aluminum, which rose 29% in the first half of this year after supply disruptions in South Africa and China, erased its gains as manufacturing contracted in the US and Europe.

Orders to US factories fell 4% in August, more than forecast and the most in almost two years, the Commerce Department said on October 2. A private report the previous day indicated the manufacturing slump worsened in September. The Institute for Supply Management said its factory index fell to the lowest level since the 2001 recession last month.

Aluminum Corp. of China yesterday said third-quarter profit will fall more than 50% because of lower demand and prices, and higher costs.

Texas Shutdown

Alcoa took a 4 cent-per-share for halting production at the Rockdale smelter in Texas. Alcoa said September 30 it would shut the remaining 150,000 tons of production at Rockdale because of ''uncompetitive'' power supplies. The company closed 120,000 tons of capacity in June.

Profit also was hurt by higher costs after a June 3 gas explosion in West Australia forced it to use more expensive diesel fuel at alumina plants there.

UBS analyst Brian MacArthur in Toronto and Goldman Sachs' Oscar Cabrera in New York reduced forecasts for base-metal prices and shares of the companies that produce them because of speculation slowing growth will hurt demand. MacArthur on October 6 reduced his price target on Alcoa to $US25 from $US46. Goldman cut its recommendation on Alcoa to ''neutral'' from ''buy'' on October 2.

Aluminum will trade lower than previously expected through at least 2010 as global economic growth slows and stockpiles of the metal expand, Morgan Stanley said in a report.

Kleinfeld said in an August 21 interview that there will be a ''real issue of undersupply'' in coming years because of rising demand from emerging markets.

Bloomberg